TSP Talk Blog

Stocks closed higher on Friday, but it was far from a bullish day as we saw a 164-point early rally in the Dow turn into a 39-point gain by the close, which was the lows, while the S&P 500 and Nasdaq lost virtually all of their early gains as they both closed up less than a point.

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The banking sector saw a big release in 3rd quarter earnings on Friday morning from Citigroup, JP Morgan, and Wells Fargo, which may have helped boost stocks early, but their early gains also dwindled as the day went on. The better than expected earnings is nice development, and the selling may have been triggered by Janet Yellen who on Friday talked about the "not so great recovery" of the economy.

Earnings are key this quarter because as we talked about last week, P/E ratios (price to earnings) have been getting inflated questioning the high value of stocks. This chart shows that they may be hitting some descending resistance since spiking off the 2011 low ratio.



And since earnings are the lifeblood of the stock market - thank you Larry Kudlow - it is obviously important that don't turn south.

But even if the U.S. bank stocks are holding up, we still need to keep an eye on Germany's Deutsche Bank, which could steal the headlines as their legal expenses continue to diminish their capital, and are now considering leaving their U.S. operation altogether. Their stock has come off their recent lows but it remains in a major downtrend trading at 13.43 a share after hitting $52 just a year and a half ago, and of course well off its pre-2008 financial crisis highs of about $125, so this hasn't been an overnight story. The question recently however has been whether they can remain solvent. If they go down it could start a nasty domino effect.

The SPY (S&P 500 / C-Fund) opened sharply higher on Friday morning following some strong earnings out of the banking sector, but once the SPY hit the 20 and 50-day EMAs, everything changed and we saw a steady decline into the end of the day. We saw a very nice positive reversal day on Thursday which followed through on Friday, but now we saw the week end with a negative reversal day, and worse...




... a negative outside reversal bar on the weekly chart. The 2120 - 2125 area looks to be an important level of support, and it was broken intraday on Thursday before that positive reversal. If this bull market is going to keep on keeping on, it looks like this week will have to be a positive one. For now, it looks like we are still seeing a big bull flag (blue), and that would be extremely positive should it break the way bull flags are supposed to break, but if the support breaks down, we could see a new longer-term negative trend developing.




The DWCF (S-fund) held at an important area of support but clearly things have been deteriorating lately. The support line and the 200-day EMA may be the lines in the sand for this bull market in small caps.




The Dow Transportation Index had a negative day on Friday but this market leader has actually been the beacon of light for the broader market lately. This chart looks good and if it can lead to the upside, there's a good chance that the rest of the market will follow.




The EFA (I-fund) had fallen below the important 200-day EMA on Thursday but managed to recapture that support line on Friday.




The price of oil has also shown some intriguing strength considering the talk of the weakening economy. As we've talked about, it may be a matter of supply being cut rather than strong demand, but if there were little demand it would be tougher for oil to be rallying. So, this is a slight positive for stocks but it may need to break above $50 to prove that it is not just in a trading range being controlled by the suppliers.




The High Yield Corporate Bonds reversed back up after Thursday's reversal day and Friday's follow-through, so no signs of this rising trend failing yet.




The AGG (Bonds / F-fund) continues to stumble and with interest rate hikes almost a certainty, the weakness makes sense since bond prices will go down when rates go higher. This looks like a possible big top forming in bonds, although they have surprised us before.




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Thanks for reading. We'll see you back here tomorrow.

Tom Crowley


Posted daily at TSP Talk - Market Commentary

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